In December 2010, National Treasury released a discussion paper on the introduction of a carbon-pricing mechanism in South Africa. The paper followed the announcement in 2009 that government is committed to reducing greenhouse gas emissions by 34% by 2020.

The key idea behind pricing carbon is that the emission of greenhouse gasses, through the negative impact it has on the environment (especially the global climate), comes at an economic cost. This cost is generally ignored, but at some point down the line someone has to pay for it by "fixing" the damage that has been caused as a result.

If one can attach a price to every ton of greenhouse gas produced, which price equals the amount of damage caused to the environment, it can be factored into the normal price of goods and services resulting in a recovery. Pricing carbon also incentivises behavioural change in producers and consumers, which leads to a reduction in greenhouse gas emissions.

Two main market-based mechanisms are used to price carbon, namely carbon taxes and emissions trading schemes. A carbon tax simply prices carbon directly by taxing the emission of each ton of greenhouse gas, or, by way of proxy, by taxing the use of the fuel that causes greenhouse gas emissions when burned. Emissions trading schemes, or cap and trade schemes, place a limit on the amount of greenhouse gasses allowed to be emitted, but allowances may be traded in the open market.

The South African discussion paper argued strongly in favour of the carbon tax option as opposed to the emissions trading option.

Australia recently released details of the framework that it intends to use in pricing carbon. The distinctive feature of the Australian framework is that it will commence as a pure carbon tax on greenhouse gas emissions, but after three years it will convert into a fully-fledged emissions trading scheme. The Australian framework therefore comprises a hybrid market-based mechanism.

The carbon tax will kick in on 1 July 2012 and carbon will be priced at AUD$23 per ton of greenhouse gas, increasing by 2.5% per year. On 1 July 2015, there will be a conversion to a "cap and trade" system. The cap will be determined by legislation and carbon permits will be allocated and auctioned, each permit allowing for the emission of 1 ton of greenhouse gas. The carbon permits may then be traded in the open market but a ceiling price and floor price will operate for the first three years. The cap will gradually be decreased over time and Australia's target for 2020 is a 5% reduction below 2000 levels.

Permits may be exported once there is no more price ceiling, or before that if there is an official link with another foreign emissions trading scheme. Compatible foreign permits may be imported once the "cap and trade" system is operational, but it is limited to 50% of the liable entity's required permits Legally the permits will be transferable financial instruments.

They will be exempt from General Sales Tax (the Australian equivalent of Value-added Tax) and a liable entity may claim the expense as an income tax deduction. The mechanism is targeted at Australia's 500 biggest polluters and will cover emissions by the energy sector, emissions from coal and certain other mining operations, emissions from industrial processes, waste disposal, and some transport and fugitive emissions. About 60% of Australia's greenhouse gas emissions will be covered.

Essentially the compliance trigger will be 25 000 tonnes of greenhouse gas emissions and the liable entities will be those with control of the operations. Non-compliance will result in steep penalties being administered.

Emissions from the agricultural sector, forestry and fisheries are wholly excluded, as well as emissions from light commercial vehicles and households. Fuel such as petrol and diesel will also not be covered.

To counter the economic tremors of the carbon pricing mechanism, Australia is rolling out assistance and support programmes on a large scale. The vast majority of the money collected will go to household assistance in the form of tax cuts and cash payments, and support systems for businesses to maintain employment levels and remain competitive.

The rest of the money will go into various research programmes and investment funds in respect of renewable energy resources and low-emission and energy-efficient technology.

Written by Heinrich Louw, Candidate Attorney, Tax Practice, Cliffe Dekker Hofmeyr